WEAKNESSES

RISK ASSESSMENT

Household consumption is boosting activity but there are signs of weakness

In 2015, growth remained sustained despite a first quarter marked by a very rigorous winter and major strikes by dock workers on the west coast. In 2016, growth is expected to significantly decrease owing to poor performances on the first half of the year, and be below its potential of 2%.

Private consumption (around 70% of GDP) will be again backed by the decline in unemployment which would drop to below 5% and the increase in employment, suggesting a rise in the employment rate (62.8%) in 2016, which remains lower than its pre-financial crisis level (66% on average between 2003 and 2007). Improving employment fosters wages increases. Since the raise of its key interest rate in December 2015 (the first in 7 years), the US central bank (Fed) has kept a wait and see approach given the context of low inflation, strong dollar and weak global economic growth. The low cost of credit encourages the rebound of activity and prices on the new and old housing market, and thus, mortgage equity withdrawal. However, some indicators have recently worsened. Hence, after reaching historically high levels in 2015, car sales are heading downwards since the beginning of 2016, revealing that the catching-up process is coming to an end. Furthermore, the increase in subprime car loans, as well as the rise in student loans must be monitored. Finally, if housing prices and new home sales continue to grow, sales in existing homes, construction permits and starts seem to peak. For corporations on the other hand, the situation is less favorable. While their immaterial expenses increase, their investments in structures decline. This situation reveals, simultaneously, the stagnation of the production capacity utilization rate (75% in July 2016), the decrease in new orders in the industry, and the erosion of profits triggered by the increase in labour cost not compensated by the weak productivity gains of an ageing productive system. In this context company insolvencies should increase in 2016. Historically, they increase when GDP growth comes close to 2%. If manufacturers suffer from dollar appreciation, the most at risk are the energy and mining sectors battered by low commodities prices. Even if shale oil producers have concentrated on the wells providing the highest returns, resulting in the closing of more than 60% of the wells in 2015, unconventional oil production is likely to continue to decrease in 2016. Conversely, the sectors showing lower risks are automotive, textile, clothing and transport due to the good performance of domestic consumption.

The dollar likely to remain strong at the expense of manufacturing exports

While the European Central Bank seems to be determined to maintain or heighten its accommodating monetary policy, the Fed seems, on the contrary to orient its own towards a tightening. In this regard the dollar is expected to further appreciate against the single currency in 2016. Its high level has increased the cost of US products amid a muted rebound in the European and Japanese partner economies, and the slowdown of the Chinese growth. This context will weigh on export growth and will encourage import growth, backed by the dynamism of consumption. However, the rise of the non-energy deficit could be offset by the near-disappearance of the energy deficit, allowing a stabilization of the current account deficit.

The public debt remains very high while the elections are coming

In view of November 2016 elections the fiscal deficit will remain high in the 2017 fiscal year. The public debt keeps an alarming trajectory since it represents 103.8% of GDP at the end of 2015, and will continue to grow in 2016. Following the primaries, Donald Trump and Hillary Clinton will respectively represent the Republican and Democratic Parties at the presidential. The former has stated that he wants to cut taxes, increase tariff protection, combat immigration, review international alliances and is against Trans Pacific Partnership agreement (TPP). The latter declared to be in favor of an increase in infrastructure expenditure, minimum wage, financial support for students, an extension of parental leave, all this being financed by a rise in high income taxation, but she is against TPP as well. Both candidates gather many negative opinions, but Trump more than Clinton, which seems to give an advantage to the latter. Nevertheless, proposals by either one of them are unlikely to be adopted, as it stands, by the new Congress. Hillary Clinton could face a House of Representatives still dominated by Republicans, and Donald Trump the hostility of a part of the Republican Party. Uncertainty could weigh on the country’s activity.

Last update : August 2016

Payment

Exporters should pay close attention to sales contract clauses on the respective obligations of the parties and determine payment terms best suited to the context, particularly where credit payment obligations are involved.

In that regard, cheques and bills of exchange are very basic payment devices that do not allow creditors to bring actions for recovery in respect of “exchange law” (droit cambiaire) as is possible in other signatory countries of the 1930 and 1931 Geneva Conventions on uniform legal treatment of bills of exchange and cheques.

Cheques are widely used but, as they are not required to be covered at their issue, offer limited guarantees. Account holders may stop payment on a cheque by submitting a written request to the bank within 14 days of the cheque's issue. Moreover, in the event of default, payees must still provide proof of claim.

“Certified checks” offer greater security to suppliers since the bank certifying the cheque thereby confirms the presence of sufficient funds in the account and makes a commitment to pay it.

Although more difficult to obtain and therefore less commonplace, “cashiers checks”, cheques drawn directly on a bank's own account, provide complete security as they constitute a direct undertaking to pay from the bank.

Bills of exchange and promissory notes are less commonly used and offer no specific proof of debt.

The open account system is only justified after a continuing business relationship has been established.

Transfers are used frequently especially via the SWIFT electronic network – operated by the Society for Worldwide Interbank Financial Telecommunication – to which most American banks are connected and which provides speedy and low-cost processing of international payments.

SWIFT transfers are particularly suitable where real trust exists between the contracting parties since the seller is dependent on the buyer acting in good faith and effectively initiating the transfer order.

For large amounts, major American companies also use two other highly automated interbank transfer systems – the Clearing House Interbank Payments System (CHIPS), operated by private financial institutions and the Fedwire Funds Service System, operated by the Federal Reserve.

Debt collection

American law is inspired by the « common law » system, an Anglo-Saxon inheritance, based on doctrine, custom and case-law.

Since the American legal system is complex and, especially as regards lawyers’ fees, costly, it is advisable to negotiate and settle out of court with customers wherever possible or else hire a collection agency.

The parties can also resort to arbitration or Alternative Dispute Resolution (ADR), a relatively informal mediation method, which makes it possible to avoid costly and lengthy ordinary court procedures.

The judicial system comprises two basic types of court: the federal District Courts with at least one such court in each State and the Circuit or County Courts under the jurisdiction of each State.

TheFederal Rules of Civil Procedurepromulgated by the Supreme Courton September 1938 and regularly amended govern the various phases of civil procedure at the federal level while each Statehas its own rules of civil procedure.

The vast majority of proceedings are heard by State courts, which apply state and federal law to disputes falling within their jurisdictions (i.e. legal actions concerning persons domiciled or resident in the State).

Federal courts, on the other hand, rule on disputes involving State governments, cases involving interpretations of the constitution or federal treaties and claims above 75,000 US$ between citizens of different American States or between an American citizen and a foreign national or foreign State body or, in some cases, between plaintiffs and defendants from foreign countries.

A key feature of the American judicial system is the pre-trial "discovery" phase whereby each party, before the main hearing, may demand evidence and testimonies relating to the dispute from the adversary before the court hears the case. During the trial itself, judges give plaintiffs and their lawyers a considerable leeway to produce pertinent documents at any time and conduct the trial in general.

This is an adversarial procedure, where the judge has more the role of an arbitrator, ensuring compliance with the procedural rules, although more and more practice enhances the part of the judge in the running of the case.

An amendment to the Federal Rules of Civil Procedure, in force since 1st December 2006, authorizes document submissions in electronic form (e-discovery) like e-mail, real time computer communications, accounting databases, Internet sites, and so on.

The “discovery phase”can last several months, even years, and entail high costs due to each adversary’s insistence on constantly providing pertinent evidence (argued by each party), and involve various means – like examinations, requests to provide supporting documents, the testimony of witnesses, and reports by detectives – before submitting them for court approval during the final phase of the proceedings.

Another feature of the American procedural system is that litigants may request a civil or criminal case to be heard by a jury (usually made up of twelve ordinary citizens not familiar with legal aspects – “twelve goodmen and true”according to the popular definition of “jury”) whose task is to deliver a verdict based overall on the facts of the case and the evidence produced during the proceedings.

In civil cases, the jury determines whether the demand is justified and also determines the penalty to impose on the offender. In criminal cases, the jury decides on the defendant’s guilt but the judge decides the punishment.

For especially complex, lengthy or expensive litigation, as in the case of insolvency actions, courts have been known to allow creditors to hold as liable the professionals (e.g. auditors) who have counselled the defaulting party, where such advisors have demonstrably acted improperly.